Economics, public policy, monetary policy, financial regulation, with a New Zealand perspective

No, Prime Minister

The Prime Minister was also on TV3’s The Nation last weekend. Most of the interview was about immigration.

Late last year, I wrote about some earlier, probably rather off-the-cuff, remarks that Key had made about immigration, in which he described the recent high net migration inflows as a “time of great celebration”.

The TV3 interview was a rather more substantial occasion (The Nation isn’t exactly a mass market programme), and it was about the issues, not just an opportunity to attack his political opponents. The Prime Minister will no doubt have been briefed for it by his own DPMC officials, and perhaps also by MBIE, the government department responsible for immigration (administration and policy). And yet I was surprised just how insubstantial his answers were, and a little alarmed at the central planner’s mentality that they evinced. On Radio New Zealand yesterday, Matthew Hooton described the current government as the most interventionist since the 1970s. That mentality was fully on display in John Key’s interview. I had to watch the interview again to be sure that I had correctly heard a Prime Minister from an avowedly centre-right party declare that there was an optimum number of (immigrant) truck drivers.

I was pleased to see that the interviewer kept the focus on the flows of non-New Zealand citizens. New Zealand can’t, and shouldn’t try to, control the comings and goings of New Zealand citizens. We can’t even, and shouldn’t try to, control the outflows of non-New Zealand citizens – the people who come and, after a time, find that New Zealand isn’t quite right for them, or just find an even better opportunity somewhere else. But every inflow of a non New Zealand citizen requires the approval of the New Zealand government – that is what immigration policy is about. (As a matter of policy, we allow any Australian citizens to move here without advance approval but (a) that is still a New Zealand policy choice, and (b) the numbers involved are pretty modest (over the last 40 years the annual net inflow of Australians has fluctuated between 0 and 3500)).

The Prime Minister, of course, was keen to emphasise the fall in the net outflow of New Zealanders. In the data released yesterday, there was still a net outflow of 3890 New Zealanders to Australia over the last year. That is, by the standards of recent decades, a small net outflow, but the people who know New Zealand best – New Zealanders – are still choosing to leave rather than to return (and to a country where real per capita income has been falling for the last couple of years, and hasn’t grown in seven years). That should be telling the Prime Minister something.

The interviewer kept trying to push the Prime Minister to name an “optimal number” for the inflow of non New Zealanders. He consistently refused to do so, asserting that there was no limit to number of arrivals he would be happy with “so long as they add value to New Zealand”. Oddly, neither he nor the interviewer mentioned that actual government policy is rather different. After all, there is a target level for the number of residence approvals granted (45000 to 5000o per annum), that target is approved by Cabinet, and the target has not changed for quite a long time. Despite all the fluctuations in the number of foreign students, or short-term workers, the residence approvals programme is the main way in which immigration policy boosts the population over time. Broadly speaking, I think it is a sensible way to run immigration policy – we shouldn’t be playing around with the target each year in the light of immediate pressure, but setting some medium-term targets and reviewing them from time to time. But there was simply no discussion as to whether 45000 to 50000 is the best target, or how we might know. Why not, for example, 30000 per annum more? Or fewer?

In fairness to the Prime Minister, there was also nothing explicit along the lines often found in MBIE documents, lauding New Zealand’s immigration policy as a “critical economic enabler” or a “key lever” in economic strategy. But he didn’t seem far from that either, but with equally little evidence. He asserts that immigration is a source of growth, without ever being quite clear what he had in mind.

Everyone recognizes that increases in immigration boost demand, and tend to boost total GDP. Bur our real interest should be in per capita or per hour worked measures, whether of GDP or of national income – and, to be even more specific, in what, if any, gains there are to those who were already here. From an economic policy perspective, immigration makes sense if it makes those of us who were already here better off. But despite running one of the largest immigration programmes in the advanced world, neither the Prime Minister, nor his advisers in MBIE and Treasury, have been able to produce any evidence that New Zealanders as a whole have been made better off. In his interview, the Prime Minister didn’t even try to make the case, to (for example) outline the channels by which he believes New Zealanders are being made better off. (And, in fairness, the interviewer didn’t push him to do so.)

Instead, the Prime Minister seemed reduced to assertions that the high rate of immigration is a “sign of success” or even “a badge of honour”, asserting that people don’t want to come to countries that aren’t doing well.

It is surprising that anyone takes that line of argument seriously. At the grim extreme, Turkey, Lebanon and Jordan – none of them terribly well-performing – have been very attractive places to non-natives in the last few years. They are simply (much) less bad than Syria. But more generally, immigrants tend to move from poorer countries to richer countries, and for all its disappointing performance over 60 years or more, New Zealand still offers higher incomes than most of the countries of the world. That people want to come here simply reflects what we already know, that New Zealand is better off than most places. It sheds no light at all on whether New Zealanders are benefiting from the large scale immigration programme run by successive governments. And that should be the question we constantly ask.

It is not as if this is some unimportant question: if New Zealand’s productivity growth or per capita income growth was outstripping that of all its peers there might still be an interesting question as to what contribution immigration was making to that outperformance. But only a handful of people would care much – there would be plenty of prosperity to go round. But we’ve kept on underperforming for decades, despite the allegedly productivity-enhancing immigration programme.

And yet the Prime Minister is adamant that “we need these people”.

I’m not entirely sure why. There are plenty of people around to offer cynical explanations of anything and everything John Key does. Perhaps there is merit to that – as for most politicians – when it comes to tactical choices. But the large-scale immigration programme seems to be one of those things which he genuinely believes in.

No doubt it helps that his official advisers (Treasury and MBIE) keep telling him we benefit from the immigration programme, even if they don’t offer – or even really try to offer – any evidence of those benefits. That inclination is probably reinforced by the fact that the global elites among whom he moves treat the benefits of immigration as almost axiomatic.

And I don’t suppose he has ever seriously engaged with the fact that, despite its poor productivity record, New Zealand has had some of the highest real interest rates in the advanced world for at least the last 25 years, or the possible connection from that (and the associated high real exchange rate) to the weakness of business investment in New Zealand, and the failure to make any progress towards his own government’s (well-motivated but questionable) goal of markedly increasing the export share of GDP.

But I suspect that a significant part of why Key supports such a large immigration programme is because he buys into the skill shortages story. It was the only story that he used in the TV3 interview. Employers tell MBIE, and those taking surveys, that they can’t find staff locally, and that if they can’t find staff it will impede their ability to grow their business. MBIE certainly believes the story – as I wrote about a while ago, it suffuses their annual report on migration trends.

What I find remarkable in this document, as in other MBIE immigration work I’ve seen, is the absence of any sense of market processes, and how the market might sort these things out. For example, if there are excellent opportunities here which New Zealanders are simply ignoring in their rush to get to Australia, surely we’d expect real wages to increase here? If that happened, some of the opportunities might disappear. Some New Zealanders might change their minds about going to Australia. Some people might regard more training as worthwhile, to better equip themselves for those higher-paying opportunities. Some will switch jobs from less rewarding ones, to the ones where the returns are now higher. Some people might work harder or stay in the workforce longer. But not one of these market mechanisms is even discussed. And this from a key economic agency, implementing the policy of a vaguely centre-right government? Does it not occur to them that “shortages” don’t happen in most markets, and when they do they are usually just a sign that the price has not adjusted. Why does MBIE think that labour is different?

Although MBIE and the government seem to see immigration largely as a labour market phenomenon (“a critical economic enabler”), the price of labour “wages” appears only once in the entire document (purely descriptively). “Price” does not appear at all. In fact, “productivity” and “competition” each appear only once, in neither case in the context of an analytical sentence. “Labour market” does appear repeatedly, but almost always only descriptively. There is simply no sense, anywhere in the document, of a competitive market process at work. If one were being unkind, one might think MBIE saw the role of government as being to ensure that the right pegs were in the right holes.

And that seemed to be how the Prime Minister saw it, as he talked of the need to juggle which occupations were on, and off, the approved list, and never once talking about market adjustments, changes in wages etc. In fact, it was where the comment about the optimal number of immigrant truck drivers came in – apparently truck drivers have recently been removed from the list.

From an individual employer level it all makes some sense. Importing a foreign worker really can relieve an individual firm’s shortages. But it simply doesn’t do so economywide, and isn’t necessary anyway. Markets and price/wage adjustments take care of reconciling supply and demand, in and across markets. One might have hoped that the Prime Minister of a centre-right government might, just once, have made that point.

When I make the point about market adjustment, I often get some sceptical comments – higher wages, I’m told, would price producers out of the market. But if we decided to have a much lower level of immigration a lot of things would change. Some industries would shrink markedly. We’d have a fairly flat population, so we’d probably have a much smaller construction sector, freeing up a lot of labour. We’d have lower interest rates, and a lower real exchange rate. Resources would, over time, shift from the non-tradables sector to the tradables sector, as more offshore opportunities became viable for smart New Zealand firms. In some sub-sectors which have been favoured by immigration policy – dairy workers for examples – wages might be expected to rise somewhat, to attract more New Zealanders into the industry. But remember that the real exchange rate would be lower. We simply don’t need government officials deciding which particular skills to import this year.

These arguments aren’t remotely new even in a New Zealand context. In a chapter in the Oxford History of New Zealand in 1981, Victoria University economic historian Professor Gary Hawke wrote

“Ironically, the success with which full employment was pursued until the late 1960s led to frequent claims that labour was in short supply so that more immigrants were desirable. The output of an individual industrialist might indeed have been constrained by the unavailability of labour so that more migrants would have been beneficial to the firm, especially if the costs of migration could be shifted to taxpayers generally through government subsidies. But migrants also demanded goods and services, especially if they arrived in family groups or formed households soon after arrival and so required housing and social services such as schools and health services. The economy as a whole then remained just as “short of labour” after their arrival.”

But 35 years on Radio New Zealand was still leading its news bulletins last night with a story along the lines of “despite record net migration flows, employers claim skill shortages are as severe as ever”. We simply shouldn’t be surprised. Immigration simply does not ease skill shortages in the economy as a whole or, typically, ease pressure on resources. Across a range of colonies of settlement, Prof James Belich illustrated that point quite effectively in his 2009 book Replenishing the Earth.

If there are real gains to New Zealanders from large scale immigration – and the onus really should be on the Prime Minister and other advocates to demonstrate those gains – they simply don’t come that way.

Finally, Auckland. The Prime Minister was astonishingly upbeat in his story about Auckland, and dismissive of the implications for house prices. Now, we can all accept that high immigration does not cause housing market problems, and serious affordability issues, when housing and land supply are only lightly regulated. But that isn’t the New Zealand situation. The government has been unwilling or unable to legislate to facilitate the sort of physical growth of Auckland that would have kept urban land (and house) prices in check. Given that, it is quite reasonable to ascribe much of the rise in Auckland house prices to the immigration policy that the government can, but won’t, change.

But the Prime Minister simply falls back on “global city” arguments. He asserts that Auckland has “reinvented itself”, and now competes on a global stage with cities like Sydney, Dubai, London and so on. According to the Prime Minister, young Aucklanders simply cannot expect house prices to come down again – this is, we are told, the price of being a “global city”.

This is really nonsense on two counts. The first, of course, is that there are plenty of successful fast-growing cities in the United States where real house prices have not risen materially at all, and where price to income ratios remain about as low as they were in New Zealand for decades. As just two examples, Houston and Atlanta are both materially larger, fast-growing, by most counts more successful, and home to much more international business than Auckland is. Yes, real house prices in Sydney and London and Auckland might not ever come down, but if so in each of them that is a direct result of government choices – constraining the supply of urban land in the face of population pressure (in the New Zealand case, the population pressure itself mostly resulting from immigration policy choices).

But perhaps more concerning is that there is just no evidence of this Auckland economic success. Auckland’s population has grown much faster than that of the rest of the country, and Auckland is much bigger than any other place in New Zealand. According to the champions of the immigration programme, and of the application of agglomerationist ideas more generally, this should have seen Auckland’s economic performance pulling away from that of the rest of the country. If anything, the data suggest that the opposite is happening. I ran this chart, from the regional GDP data, a couple of weeks ago.

If Auckland has “reinvented itself” anywhere other than in the heads of the Auckland Council and government officials, it doesn’t look to have been for the better.

The regional GDP data aren’t an ideal measure by any means – and they can be a bit cyclical, as in the short-term Auckland benefits from the initial boost to spending from high immigration flows, and suffers when immigration slows – but once again there is just no sign of the gains (incremental or transformational) that the advocates of the immigration programme, as a key economic lever, would have been looking for. International trade isn’t growing (share of GDP), productivity growth remains disappointing, our biggest and fast growing city is slipping relatively. All we are left with is some large distributional effects: firms in the non-tradables sector do okay, but those in the tradables sector suffer (and others never even get started); those who own land in Auckland do well, while those who ever want to buy into that market suffer. And so on.

There are plenty of year to year fluctuations in overall net migration numbers. They shouldn’t really be the focus, and even if they were there are distinct limits to what governments can do about them. But we deserve a much more compelling case for how the large scale medium-term immigration programme is benefiting New Zealanders as a whole than the Prime Minister (or his officials and ministers) has given us.

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20 thoughts on “No, Prime Minister”

I wish they would get you onto The Nation and other political shows to put across an informed viewpoint! This is an excellent piece and very refreshing after all the other bleatings by politicians in the last week. I hope it gets republished and shared widely.

I’m much more cynical about the government’s reasons for being happy with the current immigration levels. I’d say, 1) keeping business owners happy by allowing them to bring in overseas workers might is targeted at people that may vote national, 2) it allows the government to talk about growth in GDP, numbers of workers etc., knowing that most people will not know or think about whether there is growth in per capita terms. How much harder would the governments PR job be if there was no growth?

You might be right, of course, but remember that National is running essentially the same immigration policy as Labour was. The residence approvals target hasn’t changed at all. Of course, working holidays have become more important and students have been given more work rights but even student numbers are not (from memory) higher than they got in the previous boom (around/ 02/03).

Re your final question, perhaps it might depend on whether their wages were growing a bit faster than they are. Muldoon used to run the line that people wouldn’t recognize a balance of payments deficit if they fell over it, and perhaps the same could be said for aggregate GDP data?

John key is practical and a realist. He works with numbers. The numbers clearly indicate that only 14k of the total Permanent and Long Term Arrivals of 124k is real PLT. The argument that we have high migration is misplaced because migration is a replacement policy. Even though the government targets 40,000 to 50,000 from the pool of Foreign workers and international students, population growth in NZ is largely at the rate of natural birth which means migration is replacement.

The real question is ” Do we need a growing population?” Or “Is population decline a better option?”

If we maintained population at zero growth then we are going to be faced with more and more older people that live longer and longer. In order to maintain a zero population growth we would have to have fewer and fewer younger people. Can you expect a smaller and smaller population of younger people with a smaller and smaller tax pool to look after and care for a growing number of non productive old folk who pay no tax?

The numbers prove that a target of 40,000 to 50,000 migrants only result a small number that would choose to stay giving NZ a population growth largely by natural birth numbers. Not every migrant would stay for longer than a few years before they choose to depart for better career options that a larger population offers. NZ does not have a large enough domestic market for large corporate offices. Career options are severely limited and that is why our young leave to find better career opportunities that a larger population base presents.

As you know, most people who eventually become residents (get residence visas) do not arrive in NZ under the “residence visa” category; instead they come as students or on work visas and eventually apply for and are granted residence visas onshore.

Longevity is a separate issue, and largely manageable by, for example, raising the eligibility age for NZS (which should be raised anyway, in line with longevity gains).

Michael, you have a made a huge assumption and I notice that Greg Ninnes of Interest.co.nz has made the same huge leap of faith assumption that all the 50,000 applicants would actually end up staying in NZ. Frankly they do not. We only retain a small number. 50,000 may apply but in the next few years we could see as many as 45,000 leave for greener pastures.

No, I don’t assume it, but empirically the proportion who leave is not large enough to materially change the story. You’ll note that in my post I quite explicitly noted that we didn’t and couldn’t and shouldn’t control the non citizens who came and eventually decided NZ wasn’t for them and moved on.

Of course, if we were to give 50000 approvals and then 45000 were later to leave it would be pretty bad too, although in different ways and for different reasons.

Michael, when I arrived as a newby migrant some 35 years ago, there were 20 whom I got to know personally that actually arrived on various visas, students and tourist visas. Of that 20 all applied for permanent visas as jobs were plentiful and with job offers in hand, work permits automatically followed. I am the only one of that 20 who have continued to stay in NZ. This is mainly due to limited career opportunities. NZ is a great place to get a start but pretty lousy due to its small population and therefore severely limited opportunity to rise to more senior positions. Therefore when you refer to high migration you are more than likely double counting as you have not excluded the migrants that you added on before.

I stayed because I took a different path. I bought investment properties. It did not matter to me that my career options were limited as I was making more money in property investments so I stayed. But that anecdotal ratio is 1 retained out of 20 accepted as permanent residence.

Fascinating anecdote of your experience. But I’m not double-counting. I don’t cumulate the 45-50K pa, I just use that – esp in exchanges with you – to make the point about the annual approvals category that relates to longer-term residence rights. For the longer-term, I use our population data, our natural increase data, and the breakdown between citizen and non-citizen PLT flows. Even they aren’t perfect – since PLT is an expression of intent, and people can change their minds (NZ and foreign, coming and going) – but no one seriously doubts that without non-citizen immigration over the last 25 years our population today would be materially lower than it is now.

Michael, you make a huge assumption that wages would rise if we do not make migrants available to fill those jobs. The reality is that if that job can be done somewhere else cheaper than we would lose that job to a competitor country. It has happened in call centres, in IT and now in more professional accountancy firms. For example; I am aware of a NZ Chartered Accountant that has recently set up a rather sizable back room support in Manila staffed a year ago with only one NZ trained CA. That business has now grown to 15 Philipino Accountants trained by one NZ CA, fully qualified Philipino Accountants get paid only NZ$10k. Cost of a NZ assistant accountant in training is NZ$50k. Foreign students(with english language issues) on completion of their study program would work for NZ$35k. If our wages continue to climb those jobs disappear. We therefore have to bring down our wages in order to even have a hope of retaining those jobs.

Yes, but as I pointed out in the post the whole pattern of the economy would be different ie lower real interest rates and a lower real exchange rate. Hence my dairy example – dairy wages probably would rise somewhat, but that would be sustainable because the real exchange rate would be lower. But my argument doesn’t depend on wages rising, just on the market sorting things out.

If NZ’s problem really is high wages, our plight is much more serious than even this Cassandra would make out. I don’t think it is the problem – after all, jobs have been going abroad from advanced economies for generations as the next cheaper tier of countries come thru, and all the time the advanced world has kept on being able to more or less fully employ its people, and enjoy continuing increases in living standards (even NZ, altho we lag behind on living stds, if not employment).

Interesting on the wage debate. I guess wages should, in theory, be set in a fair market but given capital is more mobile than people, and to ggs point the world has become more connected BUT with different local labour regulations, is the labour market really ‘fair’? Also, central bankers speak of wanting labour prices to be set via firm level agreements – presumably to reflect market dynamics – but still look to aggregate wage inflation as a signal for the need to raise rates: does this add to the real interest rate / FX problem? Not sure but anyone prepared to shift countries must do so after much consideration and desire for new oppirtunity: think it means a nudge to other policy areas is a better place to start for diagnosing economic ills e.g education; apprenticeship support

But it simply doesn’t do so economy wide, and isn’t necessary anyway. Markets and price/wage adjustments take care of reconciling supply and demand, in and across markets.

Well it ain’t so in the real world I’m afraid.
Firstly NZ is not an isolated market. Its just a segment of the world market like any other.
When you need staff you need them, usually fairly quickly in today’s world. Unless you are going to advocate that the govt. i.e. the taxpayer pays to shift people and families around the country and into and out of other countries daily to meet employers needs then it ain’t never going to be so.

Indeed if you need a chef in NZ and you decide to up the going rate there is still no guarantee that you will get the properly qualified person that you need and want. And in fact if you do you most likely have simply transferred the problem to the previous employer whilst raising the cost. Insufficient supply to fill the demand and the only way to remedy that is to increase the supply of that particular type of chef. No time to wait 5 years to train one.

It’s much like the housing/land supply problem. Not enough land means not enough housing and around the merry round we go.

Looking at the work visa approvals suggests that there is a demand that exceeds supply for these sorts of workers. Now if we stop that group who will you bring to my place to pick asparagus or apples or boysenberries or in the next few weeks a record crop of Kiwifruit. Crop that has had all year to grow and must be picked for export to help pay for our over priced interest rates and so on. Or do you expect that businesses should just go home each day with half their targets met and sigh as they buy their batch at the beach whilst muttering to themselves “it ain’t worth the capital, hard work and anguish because we can’t get anyone to do the work anymore”.

you would no doubt argue that we should use some of our unemployable. Good luck with that. They are like that for a reason and as an employer we don’t want them.They are not our responsibility and if the Govt. chooses as it does to pay them for their place in the world then the govt. has a problem to fix.

Personally I have no big bother with immigration per se but where it falls over is we allow low value, poorly educated people in from places where the money is sent back and the participants arrive here to stay and get given all the privileges of being a Kiwi while not able to contribute anything back. The ones that come for the free education, medical and so on.

We also allow these days for “students” to come here to work, much of it under the table, untaxed and at a cost less than our laws prescribe.

For the first time in decades I feel excited for NZ. I’ve never seen so much business opportunity if only we could get our exchange rate and interest rates to where they should be to make us competitive and allow them to stay there instead of having a RBNZ that stops growth by perusing the wrong targets.

Immigration wouldn’t matter, indeed would be essential.

I an old enough to remember the days when the Hutt Valley was the epicenter of industry in NZ. When you went to work with a shortage of employees, everyday. Days when if the employee didn’t like something they simply said “stick ya job” and went down the road to another within the next few hours often at a higher wage rate. I can tell you from that time it was not a satisfactory place to be for either the business nor the community.
And it was a time of lots of immigration.

Its all about having a business friendly, business growing philosophy with barriers to doing business removed.
The reverse of course is emigration, something we know a lot about but totally ignore.
A disastrous consequence of fighting inflation rather than pursuing wealth goals.
Creating an own goal of causing the emigration of Kiwi’s abroad for something like 30 years until this year. At an average of 30k a year that’s some 900k Kiwi’s left home because of foolish “policy” that was inflicted on us by Govt. and the RBNZ.
Imagine if you can what NZ would be like today had they remained here and we had grown NZ with much better policy driven from much better goals.

I certainly was not committing to a view that labour markets are “fair”, only that if allowed to work price will reflect scarcity. If central planners manage supply – as with say aged care nurses or dairy workers – you want see that adjustment.

On education, NZ has seen a huge increase in tertiary participation rates in the last 30 years, to the point where returns to tertiary education here are among the very lowest in the OECD.

It is noted that nameless employers (nor govt) never provide specific details of what skills are in short supply – we only ever hear a constant mantra – not enough – we dont want to train them – just bring them in

Once upon a time larger organisations ran cadetships for training school leavers – don’t suppose they do that any more

Yeah well on training. Actually their is plenty of very poor expensive trade training now included in the polytechs.
They are expensive wastes of money and the money would be better spent back in the workshops.

Broken down incapable tradesmen wasting precious resources on salaries they could never earn in the workplace.
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Are you offering a full time jobs that will last 10 years or simply short-term seasonal work that will last 4 weeks?

Is it my job to employ people when I have work and can pay them or do you want me to pay them for life?

“But the large-scale immigration programme seems to be one of those things which he(John Key) genuinely believes in.”

I think that is a gross misdirection. John Key as the Tourism Minister and is fully responsible for the record 3.2 million tourists and spending of $11 billion pushing our accomodation and housing to its limits and that has encouraged more building of hotels and apartments

“International education is very important to New Zealand. It contributes $2.6 billion a year to our economy and 28,000 jobs for New Zealanders, plus it helps build strong linkages with the countries that are our trading future,” Tertiary Education, Skills and Employment Minister Steven Joyce says.

Changes to student visa requirements will make it easier for international students to work while studying, raise the quality standards required from education providers enrolling international students, and enable streamlined and prioritised visa processing in partnership with education providers.
These changes reflect the importance of export education, contributing NZ$2.6 billion a year to New Zealand’s economy.

The changes will take effect from December 2013 and were announced by Tertiary Education, Skills and Employment Minister Steven Joyce and Immigration Minister Michael Woodhouse